ACCT5001 S1 2010 Week 2 Self-Study:

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Week 2

ACCT5001 S1 2010 EXERCISE 1.10 (a)

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Week 2

Ch. 1: Q4, Q7, BE1.7, E1.10, PSA1.6, PSA1.7, PSA1.8, BBS1.1, PSA1.10*, E1.6*

Bear Pty Ltd Q4. A conceptual framework consists of a set of concepts defining the nature, purpose and content of general purpose financial reporting to be followed by preparers of general-purpose financial reports and standard setters. In Australia, the conceptual framework has 4 main components: [1] the reporting entity (SAC 1), [2] the objective of general-purpose financial reports (SAC 2), [3] the definition of elements in financial statements and [4] the qualitative characteristics. The purpose of the Framework is to: (a) assist the AASB in the development of future Australian Accounting Standards and in its review of existing Australian Accounting Standards, including evaluating proposed International Accounting Standards Board pronouncements; (b) assist the AASB in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by Australian Accounting Standards; (c) assist preparers of financial statements in applying Australian Accounting Standards and in dealing with topics that have yet to form the subject of an Australian Accounting Standard; (d) assist auditors in forming an opinion as to whether financial statements conform with Australian Accounting Standards; (e) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with Australian Accounting Standards; and (g) provide those who are interested in the work of the AASB with information about its approach to the formulation of Australian Accounting Standards. Profit Q7. Retained earnings are the profit retained in a company. Retained earnings are increased by profit and decreased by dividends and by losses. Statement of Changes in Equity BRIEF EXERCISE 1.7 for the year ended 30 June 2011 Revenues: Sales revenue Less: Gross profit Other revenue Rent revenue Expenses: Salaries expense Depreciation expense Other expenses Total expense 56,000 9,800 53,200 119,000 $ 7,000 70,000 Cost of goods sold 140,000 84,000 56,000 Income Statement for the year ended 31 July 2011

Return on assets ratio

Profit = Average total assets

$2,053,646 41.07% $5,000,000

$ Retained earnings, 1 July 2010 Add: Profit 4,200 7,000 $11,200

Profit margin ratio

Profit Sales

$2,053,646 21.97% $9,346,911

Retained earnings, 30 June 2011

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010 (b)

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Week 2

ACCT5001 S1 2010 Total equity

Self-Study Solutions

Week 2 235,200 $407,400

Bear Pty Ltd Statement of Financial Position as at 30 June 2011

Total liabilities and equity

$ Current assets: Cash Inventory Total current assets

Note the Statement of Financial Position can also be presented showing net assets equalling total equity $168,000

35,000 28,000 63,000

Non-current assets: Land Building Less: Accumulated depreciation Total non-current assets 196,000 19,600 176,400 344,400 168,000

Total Assets

$407,400

Current liabilities: Accounts payable Rent received in advance Total current liabilities 15,400 2,800 18,200

Non-current liabilities Bank loan Total non-current liabilities 154,000 154,000

Total liabilities

172,200

Equity Share capital Retained earnings 224,000 11,200

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010

Self-Study Solutions

Week 2

ACCT5001 S1 2010

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Week 2

PROBLEM SET A 1.6 Bear Ltd Income Statement for the month ended 31 August 2010

Bear Ltd Calculation of retained earnings for the month ended 31 August 2010

$ $ Revenues: Service revenue 11,800 Less: Expenses: Advertising expense Fuel expense Insurance expense Rent expense Repair expense Total expenses Profit 800 3,600 600 2,500 800 8,300 $3,500 Assets: Current Assets Cash Accounts receivable 12,300 25,400 37,700 Non-Current Assets Equipment Total assets 87,000 $124,700 $ $ Bear Ltd Statement of Financial Position as at 31 August 2010 Dividends $ Retained earnings, 1 August Add: Profit 0 3,500 3,500 (1,000) $2,500

Retained earnings, 31 August

Liabilities:

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010 Current Liabilities Accounts payable

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Week 2

ACCT5001 S1 2010

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Week 2

PROBLEM SET A 1.7 7,200 Pod Ltd Pod Ltd should include the following items in its statement of cash flows:

Non-Current Liabilities Bank loan Total liabilities Equity: Share capital Retained earnings Total liabilities and equity 75,000 2,500 77,500 $124,700 Pod Ltd Statement of Cash Flows for the year ended 30 June 2010 40,000 47,200 Cash paid to suppliers Cash dividends paid Cash paid to purchase equipment Cash received from customers

Cash flows from operating activities: Cash received from customers Cash paid to suppliers Net cash provided by operating activities $296,000 (170,000) 126,000

Cash flows from investing activities: Cash paid to purchase equipment Net cash used in investing activities Cash flows from financing activities: Dividends paid Net cash used in financing activities Net increase in cash (18,000) (18,000) $58,000 (50,000) (50,000)

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010 PROBLEM SET A 1.8

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Week 2

ACCT5001 S1 2010 Total current liabilities

Self-Study Solutions 863.2

Week 2

Boral Ltd Balance Sheet/Statement of Financial Position as at 30 June 2006 Non-current liabilities: Payables Interest-bearing liabilities* $m Current assets: Cash assets Accounts receivable Inventory Other current assets Total current assets 76.2 759.7 528.5 36.4 1,400.8 Deferred tax liabilities Provisions Total non-current liabilities Total liabilities NET ASSETS Equity: Issued Capital Reserves Non-current assets: Receivables Inventories Investments accounted for using equity method Other financial assets Property, plant and equipment (net) Intangible assets Other non-current assets Total non-current assets Total assets Current liabilities: Accounts payable Interest-bearing liabilities Current tax payable Provisions 608.8 1.0 63.5 189.9 Students may use the label balance sheet or statement of financial position as Boral Ltds real financial statements 2006 accounts were still labelled as a Balance Sheet. 28.2 120.7 418.4 289.1 2,908.1 352.9 68.8 4,186.2 5,587.0 If students wish to look up Borals annual report the web address is http://www.boral.com.au/PromoList/PromoList_Corporate_26092006_130807.asp?AUD=CorporateI nformation&site Retained earnings Total parent entity interest Minority interests Total equity 1,622.7 81.9 1,048.5 2,753.1 1.9 $2,755.0 39.0 1,653.4 227.6 48.8 1,968.8 2,832.0 $2,755.0

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

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ACCT5001 S1 2010

Self-Study Solutions

Week 2

ACCT5001 S1 2010

Self-Study Solutions

Week 2

PROBLEM SET A 1.10* AKA Ltd and UFO Ltd

BUILDING BUSINESS SKILLS 1.1

FINANCIAL REPORTING PROBLEM

Ratio

AKA (All dollars are in thousands)

UFO

Dominos Pizza Enterprises Ltd (a) Working capital $33,000 - $15,000 = $18,000 $20,000 - $10,000 = $10,000

(a)

Dominos total assets at 1 July 2007 were $131,584,000 and at 2 July 2006 were $106,028,000.

(b) (b) Dominos had $5,039,000 of inventory at 1 July 2007. (c) (c) Dominos had Trade and other payables totalling $26,882,000 at 1 July 2007 and $12,814,000 on 2 July 2006. (d) (d) Dominos reported sales in 2007 of $171,579,000 and in 2006 of $125,065,000. See note 2(a)

Current ratio

2.2:1 ($33,000 $15,000)

2.0:1 ($20,000 $10,000)

Debt to total assets ratio

53.1% [($15,000 + $70,000) $160,000]

87.2% [($10,000 + $160,000) $195,000]

Return on assets

10.7% =

$160,000 $140,000 / 2

$16,000

2. 9 %

$195,000 $155,000 / 2

$5,000

(e)

Dominos profit before tax decreased by $4,836,000 from 2006 to 2007, from $17,182,000 to $12,346,000.

(e)

Profit margin ratio

13.3% =

$16,000 $120,000

5.0% =

$5,000 $100,000

(f)

Dominos accounting equation is:

(f)

The comparison of the two companies shows the following:

Assets Liabilities Equity $131,584,0 00 $64,430,00 0 $67,154,00 0

Liquidity AKAs current ratio of 2.2:1 is better than UFOs 2.0:1. AKA also has higher working capital than UFO. Solvency AKAs debt to total assets ratio is lower than that of UFO, indicating that AKA has better solvency.

(g)

Dominos has current liabilities of $18,396,000 at 2 July 2006. Profitability AKA has a higher return on assets and profit margin ratio than UFO, indicating that it is more profitable than UFO. Note that UFOs higher borrowing costs, resulting from its greater reliance on debt, has reduced its profitability.

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

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ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

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ACCT5001 S1 2010

Self-Study Solutions

Week 2

EXERCISE 1.6* Cheong Pty Ltd

(a)

This is a violation of the cost principle. The inventory was written-up to its market value when it should have remained at cost.

(b)

This is a violation of the accounting entity concept. The treatment of the transaction treats Cheong Kong and Cheong Pty Ltd as one entity when they are two separate entities. The computer should not have been charged to the expense account. If paid for by the business, it should have been treated as a loan from the business to Cheong Kong.

(c)

This is a violation of the period concept. This concept states that the economic life of an entity can be divided into artificial time periods (months, quarters or a year). By adding two more days to the year, Cheong Pty Ltd would be misleading financial statement users. In addition, 2009 results would not be comparable to previous years results, and the problem would recur in 2010. The period should have been 52 weeks or 53 at the most. Retailers often use a complete number of weeks rather than an exact year. As a 365-day year consists of 52 weeks plus one day, many retailers use 52-week periods and then, approximately every 5 years, use a 53-week year. However, this is fully disclosed for comparative purposes. For example, Woolworths Limited.

ACCT5001 S1 2010 Week 2 Self-Study Solutions.doc 25/02/2010

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